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The German Left Hates Its Big Jobs Achievement

(Bloomberg Opinion) -- Germany’s Hartz reforms of the early 2000s, often lauded as an exemplary fix to a sclerotic labor market, are now in danger from a leftward shift in the party that instituted them at great political cost.

The labor reform package looms large in the German political and economic agenda. Named for Volkswagen personnel chief Peter Hartz, who led the committee that recommended it, and implemented between 2003 and 2005, the benefit shakeup was meant to increase incentives to work. It cost then Chancellor Gerhard Schroeder his political career, and set the stage for the Angela Merkel era. Academics are still arguing about Hartz’s effect on the German economy, and major papers reflecting polar views have been published in recent weeks. The Social Democratic Party (SPD), whose leadership no longer wants anything to do with longtime party head Schroeder, would now like to scrap the so-called Hartz IV system of long-term unemployment insurance. It’s part of the party’s drive to revive its electoral fortunes after two coalitions with Merkel’s Christian Democrats (CDU) have all but destroyed its identity.

The Hartz reforms were undertaken to reduce Germany’s unemployment rate, which exceeded 10 percent at the time. They created new employment opportunities and wage subsidies. Hartz IV, the final stage of the package, unlinked the benefits of the long-term unemployed from their previous pay and introduced means-tested payouts instead. That resulted in a significant cut for those with relatively high earnings before they lost their job and a slight benefit increase for the low earners. According to a paper published this month by the Institute for Employment Research, the research arm of the German Federal Employment Agency, this change caused the unemployment rate to fall by 2.2 percentage points, in large part by driving down the wages expected by people re-entering the labor force — thus increasing companies’ willingness to hire them.

The drop in wage expectations is widely credited with increasing Germany’s international competitiveness and helping the country’s economy return to growth after a recession in the early 2000s.

On the other hand, another just-published paper, by Jake Bradley of the University of Nottingham in the U.K. and Alice Kuegler of University College London, says that the Hartz reforms did result in wage drop of about 4 percent, but decreased employment by 0.16 percentage points. Many of those who had received long-term benefits instead retired or took part in retraining or other programs that don’t count against the unemployment rate. For the rest, the effects, according to this paper, were uneven: Employment among low-skilled workers, who saw the biggest wage drop, went down by two-thirds of a percentage point. What Hartz IV actually did, Bradley and Kuegler argue, is increase the rates at which the formerly jobless found and then lost jobs — something intuitively understandable given the lower value of labor.

Economists will keep arguing about the effects of Hartz: It’s not easy to separate them out in a complex economy like Germany’s. For the German left, though, Hartz IV is one of the biggest irritants among existing rules. It’s a widely hated law seen as reducing people’s worth and making them expendable. In Berlin, I’ve seen a building with “Hartz IV Kills Your Soul” stenciled in huge letters across a wall. For the SPD, which used to compete with the CDU for first place but is now often third in the polls behind the Green Party, doing away with Hartz IV is a political rallying cry that would adequately signal a meaningful shift to the left — the kind of shift one sees today in the U.S. Democratic Party or the U.K. Labour Party, with poll results the SPD would like to match.

Last month, SPD leader Andrea Nahles announced the party was “leaving Hartz IV behind.” The SPD wants to get rid of means-testing, which sometimes forces people to move out of their homes if they’re seen as too big or to run down their savings before applying for benefits. What the party proposes is a kind of basic income, or “citizen’s income” as the SPD calls it, to replace the basic Hartz IV benefit of 428 euros ($482) a month. It would also like to let older people receive higher, short-term unemployment benefits for longer and scrap what it considers senseless sanctions for Hartz IV recipients — for example, for missing an employment service appointment.

It’s doubtful that the SPD will achieve much with its proposals. Its strongest competitors on the left, the Greens, have their own plan for getting rid of Hartz IV that is similar to the SPD’s. Even if the parties present a united front against the CDU, which is dead set against replacing Hartz IV with a basic income, current polls give them no chance at governing. Germany’s unemployment, at record lows around 3.2 percent today, isn’t alarming enough for most people to worry about being long-term unemployed, and while the country’s 4 million Hartz IV recipients would appreciate the change, they don’t vote CDU, anyway.

But if the shift to the left works by the time Germany holds the next parliamentary election, plans to end Hartz IV could be harmful for the German economy, which balances dangerously between near-zero growth and recession. As it is, wage growth has outpaced output growth in recent quarters. The results of proposed employment reforms are uncertain, but they would definitely cause a jump in wages that would lead to a drop in competitiveness.

Germany, with its perennial budget surpluses, can afford a stronger social safety net — but not necessarily faster wage growth, at least not until fears of an economic slowdown have been allayed.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Leonid Bershidsky is Bloomberg Opinion's Europe columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.